J.C. Penney And Kohl's Disappoint

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 |  Includes: COST, JCP, KSS, SKS, TGT, WMT
by: Jerry R. Carter

Today same-store sales comps for November 2011 were released and disappointing numbers, especially from Kohl’s, worries investors. J.C. Penney (NYSE:JCP) closed trading yesterday +$1.77 at $32.04. Kohl’s (NYSE:KSS) is selling off nearly 7% at the time of this writing. It closed trading yesterday +$1.14 at $53.80. Yesterday both stocks benefited from a strong overall market.

J.C. Penney had estimates for lower November 2011 same-store sales of -1.6 percent. When numbers were released, the actual amount was -2.0 percent. Several stores in this sector did show better than expected estimates. Costco (NASDAQ:COST) estimated 6.5% and released an upside same-store sales surprise +9.0 percent. Saks (SAK), on the upper end of the sales spectrum, also showed surprising upside on same-store sales for November 2011, up 9.3% or 3.2% better than expected. Kohl’s, which has a customer base in the middle of the market, is off significantly on their same-store estimates, -4.2% lower than estimated when the final numbers came in.

The middle of the market retailers continue to struggle in this economy, after expansions in the middle of the 2000’s hit a major hurdle in the economic downturn in the late 2000’s. The CEO of J.C. Penney, Mike Ullman, released details of expansion with freestanding stores during this time. The expansion was a move away from shopping malls into freestanding structures, similar to other competitors in this industry sector. Although J.C. Penney and Kohl’s has legions of loyal shopping fans, operating in the middle of the pack is seldom a recipe for success in retail.

With a market cap of around $14.5B, Kohl's currently has a high ROE of 16.36% which is one of the highest in the industry. This is always attractive to investors but the ROIC at 10.10% shows how much the company makes from its equity, an impressive number. J.C. Penney, on the other hand, has a market cap of $6.8B and ROE at a much lower 4.11%. The ROIC of JCP is a stale 2.05% in comparison.

The possibility exists that over discounting was not used by Kohl’s this November and led to the lower than expected same store sales. This idea is arrived by investing NPM, net profit margins, of both of these mid-level retailers. Kohl’s has a strong NPM of 6.42% and correlates directly from management’s effectiveness. Compared to J.C. Penney’s 1.11% NPM, heavy discounting appears could hurt JCP in the long run.

The old adage that a company will “make it up on volume” is one that mid-level retails should never practice. It is detrimental in the long run to a company, with the invention of deep discount retailers such as Costco (COST) and Wal-Mart (NYSE:WMT) in the mix. If an investor needs the diversification of a mid-level retailer and the choice comes down between J.C. Penney, Kohl’s or others, Kohl’s has the short term setback of this morning, but in the long run, with strong net profit margins and +10% on the company’s money, the choice is clear.

J.C. Penney Company Info

JcPenney, one of America's leading retailers, operates over 1,100 department stores throughout the United States and Puerto Rico, as well as one of the largest apparel and home furnishing sites on the Internet, jcp.com. Serving more than half of America’s families each year, J.C. Penney offers a wide array of private, exclusive and national brands which reflect the Company’s vision to be America’s shopping destination for discovering great styles at compelling prices.

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Kohl’s Company Info

Kohl’s Corporation operates department stores in the United States. The company’s stores offer private and exclusive, as well as national branded apparel, footwear, and accessories for women, men, and children; soft home products, such as sheets and pillows; and house wares primarily to middle-income customers. As of November 10, 2011, it operated 1,127 stores in 49 states. The company also offers on-line shopping through its Web site Kohls.com. Kohl’s Corporation was founded in 1962 and is headquartered in Menomonee Falls, Wisconsin.

Disclosure: Unless listed following this disclosure, DavidsCreek, LLC or Jerry R. Carter, does not have a financial interest in any equities, equity options, futures, or futures options recommended or described herein. All employees and agents will not initiate positions until 24 hours after publication before acting on recommendations. Copyright 2011 all rights reserved. All data and statements are reasonably believed to be reliable and accurate; however DavidsCreek, LLC or Jerry R. Carter, does not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. There is a risk of loss trading equities, equities options, futures and futures options. Past performance is not a guarantee of future results.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.